News Navigator: How will Japan's GDP calculation change?

The Mainichi Shimbun answers some common questions readers may have about the new calculation for gross domestic product that the Japanese government is introducing later this year.

Question: What is gross domestic product?

Answer: Gross domestic product, or GDP, is an index representing a country's economy size. It is the sum of the added value of all products and services produced within a country over a specific period of time. Each nation calculates GDP as well as GDP growth rates based on United Nations guidelines. The figures can be easily compared internationally, and governments of different nations pay close attention to the index.

Q: What will change in the GDP calculation?

A: The U.N. revises the GDP calculation criteria every 10 to 20 years to respond to changes in the global economy. The most recent revision was done in 2008, which included costs for research and development.

For example, when an auto company builds a car by processing and assembling various parts, new value is considered as created and the product is included in the country's GDP. On the other hand, the cost of research and development for green vehicles was categorized as the cost of trial manufacturing and labor costs, and was excluded from GDP. Under the new GDP calculation, the cost of research and development will be added as capital investment, i.e. projects that create new values, the same as the cost of building new factories.

In addition, patent royalties and other spending will be considered as new value-creating investment. However, research and development costs will have the largest impact on a country's GDP.

Q: How does the new calculation affect a country's GDP?

A: Many developed countries have already shifted to the new calculation, and their GDP has risen somewhere from the mid-1 percent to mid-3 percent range under the new calculation criteria. According to the Cabinet Office, U.S. GDP rose about 3.0 to 3.6 percent after the new criteria were introduced.

While Japanese companies have been relocating their factories overseas where labor is cheaper, they are keeping their research and development bases in the country as they are the "the sources of competitiveness." The Cabinet Office predicts that research and development costs alone will push up Japan's GDP by at least 3 percent.

Q: When is Japan introducing the new calculation?

A: Starting from this year's July-September GDP, which will be released in December. Since the new calculation will be applied to past GDP figures, they will also grow by at least 3 percent. Because of this, growth rate levels will not increase.

Q: Will the new GDP calculation help the administration of Prime Minister Shinzo Abe's goal of "nominal GDP of 600 trillion yen by around 2020"?

A: In a sense, yes. The government predicts to see nominal GDP of 503 trillion yen for fiscal 2015. If the figure is pushed up by 3 percent under the new calculation, nominal GDP will increase to 518 trillion yen. Still, to reach the 600 trillion yen target in fiscal 2020, Japan will have to pull off a continued nominal growth rate of at least 3 percent. Since the country has not been able to post 3 percent growth since fiscal 1992, hurdles are still high for the 600 trillion yen mark. (Answers by Emi Yokota, Business News Department)